Economics

International trade

Buy power, sell ideas

SELLING stuff to foreigners tends to be the last hope for economies whose own consumers are unwilling or unable to part with their cash. The current slump is no different, with rich-country hopes heaped on export-led growth. A new report—Trading myths—published today by the McKinsey Global Institute investigates trade, exposing a number of fallacies about how trade has developed over time, the things that are bought and sold internationally, and the impact of open markets.

The first myth (some are more mythical that others, but it's a good theme for a paper) is that advanced economies are losing out to emerging markets, so that trade deficits are ballooning. That's not the case, as the chart below shows. In fact, the bigger story is not a myth but the mystery of why net trade is so stubbornly stable. Britain's currency, for example, has depreciated by 20% since 2008. On paper, that should boost exports and lower imports. In reality the trade pickup has been poor.

Another myth concerns the components of trade. McKinsey reckon most people think that cheap goods—imported cars and televisions say—drive advanced countries' deficits. The truth is that rich countries import lots of oil, gas and coal, and the prices of these have been historically high since the mid 2000s (second chart). A recent article by a colleague explains this in more detail. Moreover, most advanced economies—12 out of 15—actually run a surplus for knowledge-intensive manufactured goods (pharmaceuticals and aeroplane engines, say). The big picture is that rich countries buy power, and sell ideas.

America and Britain get their ideas to the international markets in a slightly different way. Rather than exporting goods packed with ideas, their knowledge exports are bound up in services (third chart). This suggests a risk: services might be easier to copy than goods. A recent report on financial innovation, for example, made clear that in finance, new ideas are rarely patented.

A third theme of the paper is the link between trade and employment. The report starts out by dispelling a couple of jobs-related myths. Trade, McKinsey recon, is not responsible for a decline in manufacturing jobs. The loss, and it has been significant, is more to do with increased productivity, combined with weak demand. Second, the notion that trade creates only low-paid jobs is wrong. In fact, many of the jobs gained through trade have been in ideas-intensive sectors, where work is well paid (fourth chart).

This then leads to the tricky question of whether trade is one of the factors causing wage inequality in rich countries. As McKinsey say:

An ongoing, as yet unresolved, debate is taking place about the impact of wages and inequality. It might appear that a 16 per cent decline in the real wages of low-skilled employees in the Unites States from 1990 to 2005, for instance, was due to a trade profile that favours the high skilled.

This is an empirical question, which can be answered through research. Academics are split: some papers find a relationship, others do not. The report doesn't cover the detail of why trade might, in some cases, lower wages. If there is a link, a strong candidate would be the ‘specific factors' trade model popularised by Paul Samuelson. The broad idea is that essential inputs—which could be capital, land or labour—used by the export sector will become more valuable as that sector gains from opportunities to sell internationally. So chemists and turbine designers in rich countries get a wage boost. By a similar logic inputs only in import-competing sectors do worse. That could mean that workers with import-specific skills might see wages reduced with more trade.

Even if this link exists, the solution is not less trade, as McKinsey rightly point out. That just makes the size of the aggregate pie—for all countries—smaller. Instead, rich countries first need to clear the trade channels debris left by years of tariff and subsidy distortion. This will ensure a greater aggregate gain from trade. To sustain this, they need to prevent valuable ideas being pinched, by promoting intellectual property rights. Finally, to reduce inequality, those lacking export-specific skills need to be trained up so that more workers gain from the opportunities trade brings. Overall, McKinsey offer policymakers a simple menu: open up your trade channels, protect your ideas and educate your workforce. Simple to say, but hard to do.

There are some for whom more training is not really a viable option. They might want to learn, but are simply unable to. Every population has these people, and any economy has to figure out what use to make of the skills that they do have.

Then there are those who could learn, but are unwilling to. Most of us in high-skill professions already have trouble wrapping our minds around the idea. After all, we typically have to keep learning new stuff every year. But there are those who have spent their careers since high school without having to learn anything new. And who see no reason why they should suddenly have to -- and apparently mere unemployment isn't a reason for them. Getting them to accept training is not just a matter of making training available. It requires a serious sales effort to convince them that they need to accept the opportunity.

I have a cousin that matches your description: "could learn but unwilling to". To me his position is clear....he will not work and he will not learn to work until every other option (welfare, unemployment insurance, family help, etc.) is removed.

Presidential Perks: Paying for Carter’s postage, Bush’s bills, and Clinton’s rent. You could call it welfare for former Presidents. It's a little-noticed part of the federal budget: Each year U.S. taxpayers pick up the tab for the expenses of our former Presidents. For the likes of Carter, Clinton and Bush that means free rent, postage, phone and office staff — all courtesy of the U.S. taxpayer. In 2010, taxpayer-financed expenses included $15,000 for Jimmy Carter's postage, $579,000 for Bill Clinton's rent and a whopping $80,000 for George W. Bush's phone bills. It adds up: All told, U.S. taxpayers were on the hook for more than $3 million of expenses for the four surviving former U.S. presidents. They certainly don't seem to need the money. These days being a former U.S. President is a lucrative business. After all, Bill Clinton raked in more than $10 million just in speaking fees last year. George W. Bush made even more: $15 million just for giving speeches. This entitlement for the very rich was put in place when at least one former president wasn't rich. Congress created this presidential entitlement in 1958 because Harry Truman couldn't afford to pay his bills. Now that former presidents have plenty of cash, Rep. Jason Chaffetz, R-Utah, is leading a bipartisan effort to end the gravy train, cutting off taxpayer-paid expenses for any ex-president making more than $400,000 a year. His bill recommends limiting presidents to a $200,000 annual pension and $200,000 in annual expenses, unless their personal income surpasses that. "Presidents should get a compensation package. They should get a retirement, and they should get some expenses," says Chaffetz. "But if they're going to go out on the trail, and they're going to give speeches, write books and make money, then there comes a point where you say, okay, the tax payer shouldn't be responsible for also footing the bill for the office expenses, and the telephone paper, and the personnel, and those offices." And this comes out of the taxpayers. I thank you Firozali A.Mulla DBA

I don't agree with the IP protection part. Patenting a turbine is one thing, patenting an electronic design is another, especially if Moore's Law is considered. Why patent if the design is going to get you in the market for 2-3 years, then be obsolete? Rather get the design out fast and through the right quality assurance processes etc.

So, I guess, " the‘specific factors’ trade model popularised by Paul Samuelson" should be considered when deciding for IP protection or technology transfer?

You pay for the brand, patent unfortunately we have very few lawyers on the patents and many get away using the similar names. I recently bought after shave lotion that is from Germany BRUT , next to this was another very cheap names BURT same colour bottle , another is Conk Flakes, marked as Qokr Fleks. Ant illiterate buyers would easily fall for these. The worst of this is the season of Islamic Hajj. The vendors from all over the world come for 20 days and have all very cheap substitutes. Roamer will Rommer Yardly would be Yarsly, Addidas would be Mode de Addidos.Phillps would be Pilips. and so on You see they know that once you are gone you cannot go back claiming for the money. We have had no patent lawyers for years and vendors take full advantage of Snoopy as Snoody Rado watches are Radio. Rolex would be Rolks I thank you Firozali A.Mulla DBA

You suggest that because services are not prone to throwing up patents, they are a riskier model for trade. I submit that it is precisely their vulnerability -- and the resulting constant constant cut and thrust of competition -- that gives the service sector vitality, durability, and regular profit. Large industrial firms with many patents to their name can afford to slack off or rely on friendly government protection. The bleeding edge of the service sector, however, has no defense but its metaphorical knives.

Shouldn't the Free Exchange blog know best of all that competition brings virile strength?